Communities need to think well ahead to head off plant closures

From a recent column I wrote in the TJ. This is an issue I think needs far more discussion.

I recently had a long talk with a person involved in economic development in southern Ontario who was ranting and raving about what he called the toxic government policy decisions that are driving investment away from the manufacturing sector.

Decisions to close or downsize a manufacturing plant, back office or software development shop are almost always made at the end of a process rather than on the spur of the moment.

There are basically three big decisions points: 1) after a period of poor financial performance, 2) At the end of a facility’s lease, and 3) when the ‘kit’ wears out.

Let’s examine the first one: A company will decide to close one or more operations to address poor financial performance. This type of closure is more acute with publicly traded companies as they will announce plant closures and job cuts just to appease shareholders. To avoid being on the list of targeted closures, as a community we should be working to ensure the local plant is among the best performing facilities.

Another key decision point is when a company’s local lease runs out. Every community should have a list of its top 100 employers and know when each firm’s local lease is coming to an end. Between six to 12 months before the lease runs out, firms will be deciding whether to make another long-term commitment. We need to be there to make the case for our community.

The third decision point is when what the British call the ‘kit’ comes to the end of its useful life. In Canada, we call this plant and equipment. A recent article in The Economist discussed the negative impact of Germany’s renewable-energy policies which have led to much higher energy costs for industrial firms. The article concludes “[a]s companies’ kit is wearing out, they are simply not replacing it, or investing abroad.”

New Brunswick has many capital intensive firms in the forest products, energy, mining and other manufacturing sectors. After these firms make a large-scale investment in your community it is very hard to pick up and leave. However, when the plant and equipment comes to the end of its useful life, they then have to decide if the underlying economics warrant making another 20 or 30-year commitment to the local operation.

When I am asked to talk with local community leaders about economic development, I almost always inquire about the status of their top employers.

How does their local operation compare to others across North America? Is it a best in class operation or a laggard? When was the last time they made a major investment in their plant and equipment in the community? When is their local lease running out? How is the company doing financially? Are they growing and adapting to meet changing market conditions?

In Saint John, for instance, there may be 40-50 firms that account for the vast majority of private sector employment. As much as possible, we should be able to answer the above questions about all of these companies.

I am certainly not suggesting we should swoop in at the last minute with a large government subsidy to try to bribe the firm to stay.

However, we should be working with the firms well in advance of those ‘decision points’ to ensure they are very happy with their local operation. If they have to close or downsize operations, we want our community to be at the bottom of the list and not the top.

There are business factors that we have no control over such as the value of currency or global market trends. However, for those business factors that are heavily influenced by the local community or public policy – energy, taxes, workforce, infrastructure, regulation, etc. – we should design those to ensure we are competitive in the long term.

Some firms are more open than others to sharing information. I advise community leaders to ‘recruit’ the local manager as an ally and help them pitch their head office on the merits of investing in our community for the long term.

We can work with the local manager to address challenges upstream before the big decision point that could lead to a very bad outcome for our community.